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Companies generally require a huge amount of funds. Now raising funds and getting investors is a long and difficult process. Let’s learn about how companies raise capital. Short term funds are achieved through money marketing, while the Capital market is the place where you raise funds with long term security and benefits. It is a platform to connect the ones in need of money and the ones who are ready to invest. They are usually bought and sold in the form of shares and bonds. The share market is one of the best examples of a capital market. The price of each share is decided by the gains and losses of the company. It allows individuals and institutions with money to spare to invest in the companies and makes them a share-owner. It is a good way of mobilising money and allows the money to be utilised for purposes. Today the share market is one of the biggest things with multiple investors.
Significance of Capital market
A capital market is a long term investment with long maturity. It is very important in moving the money to the needy.
Growth of Companies
It does not just take a small amount of money to manage a company. There is always a demand for money for multiple reasons. It is almost impossible for a single person to make such a huge investment. This is where capital marketing comes into play. Capital marketing mobilises this money and helps the ones with excessive money to utilise it. Therefore, it helps the companies grow and also helps them provide quality services and goods, in turn increasing the economy of the place.
Creates Balance
Capital marketing ensures that the flow of money is balanced. It creates an equal footing between the one supplying and the one in demand. The investor becomes a part of the business and bears the losses, and enjoys the profit. It directs the flow of money towards profitable businesses and prevents stagnation of the money.
Types of Capital Market
There are two types of capital markets: primary and secondary markets.
Primary Market
The primary market deals with the new securities in the market, that is, when the company first enters and issues new bonds or shares. This investment mainly goes to the primary requirements of a company, that is, for building and laying down the required machinery or furniture. These kinds of investments are directly made to the company and usually happen on a larger scale, primarily by the institutions.
Secondary Market
Secondary market deals with companies that have already been established. The shares are traded between the previous and new investors. This is where the investors gain or lose their money based on the stock fluctuations. It does not directly contribute to the capital but ensures cash flow.
Capital Market Instruments
The securities given out by the companies can be of two types, Ownership securities and creditor ship securities. Let us understand what they mean.
Ownership Securities
Ownership securities, most commonly known as stocks or shares, are the most commonly used instruments of the capital market that help companies raise capital. These shares are again divided into equity and preference shares.
Equity Shares
Equity is a part-ownership of the company’s assets. The investor buying these shares has a right to vote to select companies’ management. The share value can increase or decrease based on the profits and the losses of the company. This means that the value of a share is constantly fluctuating.
Preference Shares
Preference shares are a hybrid of equity and debt. They are a long term source of finance. They are also called hybrid financing instruments as they have features of equity and debt. Preference shares are generally safer for the investors as it ensures the return of the money. A company could choose to not pay the amount if they did not make sufficient profits in the year. It is also beneficial for the company as the preference share owners do not possess a right to vote. This, in turn, makes sure that the company retains its ownership as well as the capital.
There are other types of shares, such as deferred shares. Deferred shares or foundership, as suggested by the name, are given to the founders. These shareholders generally get the dividend before the preference or equity share owners.
Creditorship Security
Creditorship securities come mostly in the form of debentures. So what are debentures? They are just an alternative way of saying loans. When the company decides to raise money for, let’s say, the purpose of expansion, it issues debentures. The investors who buy these debentures become creditors of the company and do not have any ownership. This loan comes with a fixed interest rate depending upon the scale of the company. They are instruments of the capital market and generally come with a certificate of debt with the seal of the company. It is also considered safer for investors as the company needs to pay dividends irrespective of the profits.
Conclusion
Capital markets are important as they ensure a balance in the flow of money. They also help in the development of the economy. It becomes important to understand these markets. These markets provide securities in the form of bonds, shares and debentures. Shares can be of two types, Ownership shares and creditorship shares. Ownership shares are equity shares and preference shares, while debentures are preference shares. To understand more about the market, try to refer to notes on equity; the differences between the capital market and money market.
